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98. Big-Mouth Frog Corporation had revenues of $300,000, expenses of $200,000, and
dividends of $45,000. When Income Summary is closed to Retained Earnings, the amount
of the debit or credit to Retained Earnings is a
a. debit of $55,000.
b. debit of $100,000.
c. credit of $55,000.
d. credit of $100,000.
*99. The income statement of Dolan Corporation for 2014 included the following items:
Interest revenue $121,000
Salaries and wages expense 180,000
Insurance expense 18,200
The following balances have been excerpted from Dolan Corporation’s balance sheets:
December 31, 2014 December 31, 2013
Interest receivable $18,200 $15,000
Salaries and wages payable 17,800 8,400
Prepaid insurance 2,200 3,000
The cash received for interest during 2014 was
a. $102,800.
b. $117,800.
c. $121,000.
d. $124,200.
*100. The income statement of Dolan Corporation for 2014 included the following items:
Interest revenue $121,000
Salaries and wages expense 180,000
Insurance expense 18,200
The following balances have been excerpted from Dolan Corporation’s balance sheets:
December 31, 2014 December 31, 2013
Interest receivable $18,200 $15,000
Salaries and wages payable 17,800 8,400
Prepaid insurance 2,200 3,000
The cash paid for salaries and wages during 2014 was
a. $189,400.
b. $170,600.
c. $171,600.
d. $197,800.
*101. The income statement of Dolan Corporation for 2014 included the following items:
Interest revenue $121,000
Salaries and wages expense 180,000
Insurance expense 18,200
Test Bank for Intermediate Accounting, Fifteenth Edition
3 – 22
The following balances have been excerpted from Dolan Corporation’s balance sheets:
December 31, 2014 December 31, 2013
Interest receivable $18,200 $15,000
Salaries and wages payable 17,800 8,400
Prepaid insurance 2,200 3,000
The cash paid for insurance premiums during 2014 was
a. $16,000.
b. $15,200.
c. $19,000.
d. $17,400.
*102. Olsen Company paid or collected during 2014 the following items:
Insurance premiums paid $ 25,800
Interest collected 62,800
Salaries paid 260,400
The following balances have been excerpted from Olsen’s balance sheets:
December 31, 2014 December 31, 2013
Prepaid insurance $ 2,400 $ 3,000
Interest receivable 7,400 5,800
Salaries and wages payable 24,600 21,200
The insurance expense on the income statement for 2014 was
a. $20,400.
b. $25,200.
c. $26,400.
d. $31,200.
*103. Olsen Company paid or collected during 2014 the following items:
Insurance premiums paid $ 25,800
Interest collected 62,800
Salaries paid 260,400
The following balances have been excerpted from Olsen’s balance sheets:
December 31, 2014 December 31, 2013
Prepaid insurance $ 2,400 $ 3,000
Interest receivable 7,400 5,800
Salaries and wages payable 24,600 21,200
The interest revenue on the income statement for 2014 was
a. $49,600.
b. $61,200.
c. $64,400.
d. $76,000.
The Accounting Information System
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*104. Olsen Company paid or collected during 2014 the following items:
Insurance premiums paid $ 25,800
Interest collected 62,800
Salaries and wages paid 260,400
The following balances have been excerpted from Olsen’s balance sheets:
December 31, 2014 December 31, 2013
Prepaid insurance $ 2,400 $ 3,000
Interest receivable 7,400 5,800
Salaries and wages payable 24,600 21,200
Salaries and wages expense on the income statement for 2014 was
a. $214,600.
b. $257,000.
c. $263,800.
d. $306,200.
*105. The Supplies account had a balance at the beginning of year 3 of $8,000 (before the
reversing entry). Payments for purchases of supplies during year 3 amounted to $50,000
and were recorded as expense. A physical count at the end of year 3 revealed supplies
costing $11,500 were on hand. Reversing entries are used by this company. The required
adjusting entry at the end of year 3 will include a debit to:
a. Supplies Expense for $3,500.
b. Supplies for $3,500.
c. Supplies Expense for $46,500.
d. Supplies for $11,500.
*106. At the end of 2014, Drew Company made four adjusting entries for the following items:
1. Depreciation expense, $25,000.
2. Expired insurance, $2,200 (originally recorded as prepaid insurance.)
3. Interest payable, $6,000.
4. Rent receivable, $10,000.
In the normal situation, to facilitate subsequent entries, the adjusting entry or entries that
may be reversed is (are)
a. Entry No. 3 only.
b. Entry No. 4 only.
c. Entry No. 3 and No. 4.
d. Entry No. 2, No. 3 and No. 4.
*107. Garcia Corporation received cash of $36,000 on August 1, 2014 for one year’s rent in
advance and recorded the transaction with a credit to Rent Revenue. The December 31,
2014 adjusting entry is
a. debit Rent Revenue and credit Unearned Rent Revenue, $15,000.
b. debit Rent Revenue and credit Unearned Rent Revenue, $21,000.
c. debit Unearned Rent Revenue and credit Rent Revenue, $15,000.
d. debit Cash and credit Unearned Rent Revenue, $21,000.
Test Bank for Intermediate Accounting, Fifteenth Edition
3 – 24
*108. Lopez Company received $14,400 on April 1, 2014 for one year’s rent in advance and
recorded the transaction with a credit to a nominal account. The December 31, 2014
adjusting entry is
a. debit Rent Revenue and credit Unearned Rent Revenue, $3,600.
b. debit Rent Revenue and credit Unearned Rent Revenue, $10,800.
c. debit Unearned Rent Revenue and credit Rent Revenue, $3,600.
d. debit Unearned Rent Revenue and credit Rent Revenue, $10,800.
*109. Gibson Company paid $12,000 on June 1, 2014 for a two-year insurance policy and
recorded the entire amount as Insurance Expense. The December 31, 2014 adjusting
entry is
a. debit Insurance Expense and credit Prepaid Insurance, $3,500.
b. debit Insurance Expense and credit Prepaid Insurance, $8,500.
c. debit Prepaid Insurance and credit Insurance Expense, $3,500
d. debit Prepaid Insurance and credit Insurance Expense, $8,500.
Multiple Choice Answers—Computational
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MULTIPLE CHOICE—CPA Adapted
110. On September 1, 2014, Lowe Co. issued a note payable to National Bank in the amount
of $900,000, bearing interest at 9%, and payable in three equal annual principal payments
of $300,000. On this date, the bank’s prime rate was 8%. The first payment for interest
and principal was made on September 1, 2015. At December 31, 2015, Lowe should
record accrued interest payable of
a. $27,000.
b. $24,000.
c. $18,000.
d. $16,000.
111. Eaton Co. sells major household appliance service contracts for cash. The service
contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts
are credited to Unearned Service Revenue. This account had a balance of $3,800,000 at
December 31, 2014 before year-end adjustment. Service contract costs are charged as
incurred to the Service Contract Expense account, which had a balance of $900,000 at
December 31, 2014.
Service contracts still outstanding at December 31, 2014 expire as follows:
During 2015 $960,000
During 2016 1,140,000
During 2017 700,000
The Accounting Information System
3 – 25
What amount should be reported as Unearned Service Revenue in Eaton’s December 31,
2014 balance sheet?
a. $2,900,000.
b. $2,800,000.
c. $1,900,000.
d. $1,000,000.
112. In November and December 2014, Lane Co., a newly organized magazine publisher,
received $60,000 for 1,000 three-year subscriptions at $20 per year, starting with the
January 2015 issue. Lane included the entire $60,000 in its 2014 income tax return. What
amount should Lane report in its 2014 income statement for subscriptions revenue?
a. $0.
b. $3,333.
c. $20,000.
d. $60,000.
113. On June 1, 2014, Nott Corp. loaned Horn $800,000 on a 12% note, payable in five annual
installments of $160,000 beginning January 2, 2015. In connection with this loan, Horn
was required to deposit $5,000 in a noninterest-bearing escrow account. The amount held
in escrow is to be returned to Horn after all principal and interest payments have been
made. Interest on the note is payable on the first day of each month beginning July 1,
2014. Horn made timely payments through November 1, 2014. On January 2, 2015, Nott
received payment of the first principal installment plus all interest due. At December 31,
2014, Nott’s interest receivable on the loan to Horn should be
a. $0.
b. $8,000.
c. $16,000.
d. $24,000.
114. Included in Allen Corp.’s balance sheet at June 30, 2013 is a 10%, $3,000,000 note
payable. The note is dated October 1, 2013 and is payable in three equal annual
payments of $1,500,000 plus interest. The first interest and principal payment was made
on October 1, 2014. In Allen’s June 30, 2015 balance sheet, what amount should be
reported as accrued interest payable for this note?
a. $337,500.
b. $225,000.
c. $112,500.
d. $75,000.
115. Colaw Co. pays all salaried employees on a biweekly basis. Overtime pay, however, is
paid in the next biweekly period. Colaw accrues salaries expense only at its December 31
year end. Data relating to salaries earned in December 2014 are as follows:
Last payroll was paid on 12/26/14, for the 2-week period ended 12/26/14.
Overtime pay earned in the 2-week period ended 12/26/14 was $20,000.
Remaining work days in 2014 were December 29, 30, 31, on which days there was no
overtime.
The recurring biweekly salaries total $360,000.
Test Bank for Intermediate Accounting, Fifteenth Edition
3 – 26
Assuming a five-day workweek, Colaw should record a liability at December 31, 2014 for
accrued salaries of
a. $108,000.
b. $128,000.
c. $216,000.
d. $236,000.
116. Tolan Corp.’s trademark was licensed to Eddy Co. for royalties of 15% of sales of the
trademarked items. Royalties are payable semiannually on March 15 for sales in July
through December of the prior year, and on September 15 for sales in January through
June of the same year. Tolan received the following royalties from Eddy:
March 15 September 15
2013 $5,000 $7,500
2014 6,000 9,500
Eddy estimated that sales of the trademarked items would total $30,000 for July through
December 2014. In Tolan’s 2014 income statement, the royalty revenue should be
a. $14,000.
b. $15,500.
c. $20,000.
d. $20,500.
117. At December 31, 2014, Sue’s Boutique had 1,000 gift certificates outstanding, which had
been sold to customers during 2014 for $60 each. Sue’s operates on a gross profit of 60%
of its sales. What amount of revenue pertaining to the 1,000 outstanding gift certificates
should be deferred at December 31, 2014?
a. $0.
b. $24,000.
c. $36,000.
d. $60,000.
*118. Compared to the accrual basis of accounting, the cash basis of accounting overstates
income by the net increase during the accounting period of the
Accounts Receivable Accrued Expenses Payable
a. No No
b. No Yes
c. Yes No
d. Yes Yes
*119. Gregg Corp. reported revenue of $1,450,000 in its accrual basis income statement for the
year ended June 30, 2015. Additional information was as follows:
Accounts receivable June 30, 2014 $400,000
Accounts receivable June 30, 2015 530,000
Uncollectible accounts written off during the fiscal year 15,000
Under the cash basis, Gregg should report revenue of
a. $1,035,000.
b. $1,050,000.
c. $1,305,000.
d. $1,335,000.
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*120. Jim Yount, M.D., keeps his accounting records on the cash basis. During 2015, Dr. Yount
collected $350,000 from his patients. At December 31, 2014, Dr. Yount had accounts
receivable of $40,000. At December 31, 2015, Dr. Yount had accounts receivable of
$70,000 and unearned revenue of $10,000. On the accrual basis, how much was Dr.
Yount’s patient service revenue for 2015?
a. $310,000.
b. $370,000.
c. $380,000.
d. $390,000.
*121. The following information is available for Ace Company for 2014:
Disbursements for purchases $1,360,000
Increase in trade accounts payable 100,000
Decrease in merchandise inventory 40,000
Cost of goods sold for 2014 was
a. $1,500,000.
b. $1,420,000.
c. $1,300,000.
d. $1,220,000.
Multiple Choice Answers—CPA Adapted
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Test Bank for Intermediate Accounting, Fifteenth Edition
3 – 28
DERIVATIONS — Computational
No. Answer Derivation
The Accounting Information System
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DERIVATIONS — CPA Adapted
No. Answer Derivation
BRIEF EXERCISES
BE. 3–122—Definitions.
Provide clear, concise answers for the following.
1. What is the accrual-basis of accounting?
2. What is an accrued expense?
3. What is accrued revenue?
4. What is a prepaid expense?
5. What is unearned revenue?
*6. State the rule that indicates which adjusting entries for prepaid and unearned items should be
reversed.
Test Bank for Intermediate Accounting, Fifteenth Edition
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Solution 3-122
BE. 3–123—Terminology.
In the space provided at the right, write the word or phrase that is defined or indicated.
1. Revenue and expense accounts. 1. _______________________________________
2. An optional step in the accounting 2. _______________________________________
cycle.
3. A revenue collected, but not recognized.3. _______________________________________
4. A revenue recognized, but not collected.4. _______________________________________
5. Asset, liability, and equity accounts. 5. _______________________________________
6. An expense paid, but not incurred. 6. _______________________________________
7. An expense incurred, but not paid. 7. _______________________________________
Solution 3-123
BE. 3–124—Accrued items and deferred (unearned or prepaid) items.
Generally accepted accounting principles require the use of accruals and deferrals in the
determination of income. How is income determined under the accrual-basis of accounting?
Include in your answer what constitutes an accrued item and a deferred (prepaid) item, and give
appropriate examples of each.
The Accounting Information System
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Solution 3-124
EXERCISES
Ex. 3-125—Adjusting entries.
Present, in journal form, the adjustments that would be made on July 31, 2015, the end of the
fiscal year, for each of the following.
1. The supplies inventory on August 1, 2014 was $9,350. Supplies costing $22,150 were
acquired during the year and charged to the supplies inventory. A count on July 31, 2015
indicated supplies on hand of $8,810.
2. On April 30, a ten-month, 6% note for $30,000 was received from a customer.
*3. On May 1, $12,000 was collected as rent for one year and a nominal account was credited.
Solution 3-125
Test Bank for Intermediate Accounting, Fifteenth Edition
3 – 32
Ex. 3-126—Adjusting entries.
Reed Co. wishes to enter receipts and payments in such a manner that adjustments at the end of
the period will not require reversing entries at the beginning of the next period. Record the
following transactions in the indicated manner and give the adjusting entry on December 31,
2014. (Two entries for each part.)
1. An insurance policy for two years was acquired on April 1, 2014 for $18,000.
2. Rent of $12,000 for six months for a portion of the building was received on November 1,
2014.
Solution 3-126
Ex. 3-127
The adjusted trial balance of Ryan Financial Planners appears below. Using the information from
the adjusted trial balance, you are to prepare for the month ending December 31:
1. an income statement.
2. a retained earnings statement.
3. a balance sheet.
RYAN FINANCIAL PLANNERS
Adjusted Trial Balance
December 31, 2014
Debit Credit
Cash …………………………………………………………………………………. $ 2,900
Accounts Receivable ……………………………………………………………. 2,200
Supplies …………………………………………………………………………….. 1,800
Equipment …………………………………………………………………………. 16,000
Accumulated Depreciation—Equipment ………………………………….. $ 4,000
Accounts Payable………………………………………………………………… 3,300
Unearned Service Revenue ………………………………………………….. 5,000
Common Stock ……………………………………………………………………. 10,000
Retained Earnings ……………………………………………………………….. 4,400
Dividends …………………………………………………………………………… 2,000
Service Revenue …………………………………………………………………. 4,200
Supplies Expense………………………………………………………………… 600
Depreciation Expense ………………………………………………………….. 2,500
Rent Expense ……………………………………………………………………… 2,900 ______
$30,900 $30,900
The Accounting Information System
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Solution 3-127 (20 min)
Test Bank for Intermediate Accounting, Fifteenth Edition
3 – 34
*Ex. 3-128—Cash basis vs. accrual basis of accounting.
Contrast the cash basis of accounting with the accrual basis of accounting.
*Solution 3-128
*Ex. 3-129—Accrual basis.
Sales salaries paid during 2014 were $85,000. Advances to salesmen were $1,100 on January 1,
2014, and $800 on December 31, 2014. Sales salaries accrued were $1,360 on January 1, 2014,
and $1,880 on December 31, 2014. Show the computation of sales salaries on an accrual basis
for 2014.
*Solution 3-129
*Ex. 3-130—Accrual basis.
The records for Todd Inc. showed the following for 2014:
Jan. 1 Dec. 31
Accrued expenses $1,300 $2,150
Prepaid expenses 720 870
Cash paid during the year for expenses, $42,500
Show the computation of the amount of expense that should be reported on the income
statement.
*Solution 3-130